Court Rules Against Charities That Sell Insurance

Jun. 24, 1986

WASHINGTON (AP) _ Thousands of non-profit organizations under a new Supreme Court ruling will be forced to pay taxes on income earned from selling group insurance to their members.

The court ruled 6-1 Monday against the American Bar Endowment, a group dedicated to furthering legal research and improving the administration of justice. The group's members are all 310,000 lawyers who belong to the American Bar Association.

The decision, which also said members may not escape paying taxes by claiming part of their premiums as charitable deductions, cost the endowment $6 million. The Reagan administration said hundreds of millions of dollars in tax revenue were at stake nationwide.

In other action, the court:

-Agreed to consider forcing Texaco Inc. to post a potentially ruinous $12 billion bond while appealing an $11.1 billion judgment won in Texas by Pennzoil.

-Rejected an appeal by air traffic controllers fired by the government for an illegal strike in 1981. The controllers argued they have a right to their old jobs.

-Cleared the way for an unusual disciplinary investigation of U.S. District Judge Alcee Hastings of Miami, acquitted in 1983 of charges he solicited a $150,000 bribe.

-Agreed to decide, in a Reagan administration bid to reinstate a Texas man's drug conviction, whether police may enter fenced-in property and look into a barn without getting a court search warrant.

-Upheld Florida murderer Willie Jasper Darden's conviction and death sentence despite a prosecutor's remark that Darden was ''an animal'' who deserved to have his face ''blown off'' by the victim.

In the tax-exemption case, Justice Thurgood Marshall noted in his opinion for the court that in 1969 Congress passed a tax reform law that requires charitable groups to pay taxes on ''unrelated trade or business'' that they conduct.

''This case presents an example of precisely the sort of unfair competition that Congress intended to prevent,'' he said. ''If ABE's members may deduct part of their premium payments as a charitable contribution, the effective cost of ABE's insurance will be lower than the cost of competing policies that do not offer tax benefits.''

The endowment has provided group insurance for ABA members since 1955, offering life, health, accident and disability coverage underwritten by major insurance firms. In 1980, more than 57,000 ABA members were enrolled in one or more of the insurance plans.

The Internal Revenue Service calculated the endowment's insurance dividends to be $19 million for 1979 through 1981. The money pays for education projects. The IRS assessed the endowment some $6 million in back taxes and the endowment paid the money and then sued for a refund.

Monday's ruling overturned a federal appeals court decision in favor of the organization.

Earlier this year, the court said the American College of Physicians generally must pay federal taxes on advertising revenue from its professional journals.

Justice John Paul Stevens dissented and Justices Lewis F. Powell and Sandra Day O'Connor did not take part in the case.

In other developments, the court:

-Upheld by an 8-1 vote Maine's ban on importing live baitfish into the state.

-Gave states greater latitude in determining which poor people qualify for Medicaid assistance.

-Upheld a decision forcing North Carlina to get federal approval for all changes, dating back to 1965, in the way superior court judges are elected in 40 of the state's 100 counties.

-Left intact $500 fines against two North Carolina women who used their tax returns to protest U.S. military spending.